For a producer, a swap allows you to achieve a fixed price on an agreed notional quantity of your product.
The transaction is cash settled on the contract maturity date, as we don't take physical delivery of the commodity at the bank. The price used to calculate the cash settlement amount is the Commodity Reference Price (CRP). The CRP is the floating swap price for the relevant commodity, based on the prices quoted on a reference Futures Exchange for that commodity.
- Secures a price for a portion of your deliverable product.
- Assists you in protecting against adverse commodity price movements.
- Enables you to fix a price for up to 3 years; the physical market is generally much shorter.
- Is not commodity grade-specific, unlike most physical sales.
Points to consider
- It may remove all or part of the benefit from any favourable movement in the sale price of your product.
- You're still exposed to basis risk which can occur when the sale of the underlying physical commodity does not exactly correlate with the underlying swap value.
Who might need it?
If you're a producer who wants to manage the risks associated with exposure to adverse movements in the prices you receive for commodities and are looking for greater certainty for planning and budgeting purposes.